Tuesday, July 28, 2015

Is the gold price manipulated?

One of the most commonly
held beliefs among gold investors is that the market for gold is heavily manipulated. It
has become an article of faith among gold advocates that the price is subject to
direct control by government, central banks and other parties who have a vested
interest in depressing the gold price. In this commentary we’ll
explore this belief and try to arrive at a firm conclusion as to its veracity.

Nearly four years after
the gold bear market began it has become increasingly common to hear gold
writers mention the gold conspiracy theory in their commentaries. I
can’t recall as many references to gold manipulation since the late 1990s, when
the gold price was nearing the end of its 21-year bear market. At
that time it was quite normal to see discussions of gold market manipulation as
gold investors were becoming frustrated by gold’s seeming inability to
rally. Meanwhile the stock market was zooming to all-time highs,
which made gold bugs feel even more frustrated for missing out on the equities
bull market.

At the time, the
rationale behind the alleged gold price manipulation was the prevailing belief
that the U.S. government favored a stronger dollar. The strong
dollar policy of then Treasury Secretary Robert Rubin catered to this
belief. It was thought by conspiracy theorists that the U.S. sought
to collapse of the vulnerable nations by weakening foreign currencies in order
to facilitate a fully integrated global economy. This theory was
given some credence by the near collapse of commodities in the summer of 1998
along with currency crises in Russia, Argentina and several Pacific Rim
nations. As it turned out, the scare was short lived and gold and
other commodities soon thereafter established a long-term bottom.

The market for gold is immensely
huge and virtually impossible for any one entity to control its price
swings. Beyond the very immediate term, any attempt at raising or
depressing gold prices would almost certainly meet with failure. Even
a coterie of interests devoted to pushing gold prices lower would meet with
certain failure due to the enormous size and complexity of the market. As one well known market analyst of the
previous century commented, “…the market itself is bigger than all the ‘pools’
and ‘insiders’ put together….the great market movements are beyond the
manipulation of the combined financial interests of the world.”

One commonly shared
belief among gold bugs who subscribe to the manipulation theory is belief in a
global conspiracy. Probably the most famous example of this is the
Illuminati concept. Illuminati theorists believe in a highly
organized group of elite individuals within government, industry and finance
who share the common goal of undermining the sovereignty of nations and
establishing a one-world government.

This group, moreover, is
allegedly unified by centuries of blood ties and political connections. In his book, “Exploding the Doomsday Money
Myths,” Sherman S. Smith observed: “The idea of such total unity and perfect
loyalty among relatives and different families and nations is
unfathomable. From what we know about
history and the infighting that can occur within even a single family unit, the
possibility of such a large group successfully devising and implementing a
planned strategy for more than two hundred years is miniscule.”

While there’s no denying
that conspiracies and monopolies do exist, there’s also no denying that for
every attempt at controlling an industry or a commodity there is a counterbalance. Within any group of would-be monopolists
there are those who can never agree on a common plan for gaining control;
common experience teaches this (as anyone familiar with corporate politics
knows). Further, there are always other
parties who would also like to gain total control in opposition to other
conspiracy groups. In other words, there
is no one overriding “Illuminati” monopoly group, but multiple groups of
would-be controllers competing amongst themselves. “If this weren’t true,” wrote Smith, “the
entire world would already be controlled by the Mafia or other such underworld
organization.”

There are several
questions which should be asked by those who subscribe to the gold manipulation
theory. To begin with, why would manipulators actively seek to push
prices lower when there is less to be gained by a lower gold price than a
higher one? The manipulation crowd is presumably in favor of
multinational businesses which comprise the global economy. It’s
well known that higher commodity prices reflect a healthy outlook for big
business due to the increased demand for raw materials and industrial
inputs. Gold being the strongest barometer for commodities demand, a
falling gold price is more apt to reflect deflation, which is the bane and
scourge of big business. If anything, manipulators would have more
interest in raising gold prices, not crashing them.

Secondly, what interest
could gold manipulators have in lowering gold prices when it automatically
presumes a stronger dollar? A stronger currency does no favors to
the U.S. economy over the longer term. It results in lower export
prices for U.S. manufacturers and strains profit margins.As the Wall
Street Journal reported on April 24, the strong dollar has been “wreaking
havoc” on the profit margins of American multinationals.A stronger dollar forces multinationals to
raise prices in order to offset currency issues, yet as WSJ pointed out, this
only tends to depress profits due to lower sales.

In fact if a gold
conspiracy did exist, the only conceivable reason for knocking down prices
would be for the sole purpose of allowing the manipulators to buy the gold back
at bargain levels. This in turn would allow them to profit from the
inevitable bull market which always eventually follows a long-term bear
market. To this end, I can’t recall gold bugs discussing
manipulation during the glory years between 2002 and 2011 when the gold price
was rocketing to all-time highs. Indeed,
it would seem that cries of “manipulation!” are selectively applied to only
those times when gold’s prospects have dwindled.

Finally, if the
conspiracy theorists truly believe that the gold price is subject to
manipulation then why do they advocate owning gold? This is probably the biggest inconsistency of
their hypothesis. Why even touch gold if
its price is subject entirely to the whims of an elite group of power
brokers? Could it be that the ringleaders
of the conspiracy theorists haven’t bothered to smooth out this dissonance because
so many of them have a vested interest in promoting gold coins?

I’ve noticed over the
years that many conspiracy theorists advocate owning gold; some of them even
sell it as retailers, regardless of whether its price is rising or
falling. In fact, some of the most
aggressive marketing efforts of gold bullion coins occur when the gold price is
showing its greatest weakness. It comes
across as contradictory that the very people who declaim loudest against gold
manipulation are also those who advise owning it even when its investment
prospects are dim. Could it be that
there is just as much a conspiracy among gold coin retailers as there allegedly
is among the alleged gold market manipulators?

Gold’s greatest
attribute is that of a fear barometer.
When investors are concerned about the longer-term economic outlook they
invariably turn to gold as a safe haven.
This was true in the 1970s when investors worried over the impact of
runaway inflation; it was also evident in the previous decade when they had
many concerns about war, terrorism and the global economy. When investors are less fearful, however,
gold loses its luster as safe havens are ignored in favor of riskier assets. This, and not some well organized gold
conspiracy, is why gold’s price has been declining since 2011.